Recently, I asked my self-employed wife, “What do you think bookkeeping is?” She responded, “It’s when you add some stuff, subtract some stuff, and then you get a total.”
That’s the moment I realized that we needed to talk. Not just me and her, but myself and all new business owners. Because bookkeeping is NOT just adding and subtracting stuff.
When you launch a new business, you vaguely hear you’re supposed to track your income and expenses for taxes… and that’s about it. Nobody talks about the logistics of how you’re supposed to do it, and newbies are left to fend for themselves in this new financial wilderness.
That stops now. Think of this as your personal survival guide for tracking your income and expenses. The bookkeeping system you choose is one of the first major business decisions you’ll make—so let’s make it count.
Key takeaways
Bookkeeping is the process of organizing and recording all your business’s financial transactions.
You can’t run a functional business—let alone one poised for growth—without maintaining a bookkeeping practice.
You need to track all your business expenses and various types of income. You can track them on a good old-fashioned spreadsheet or use bookkeeping/accounting software.
Ideally, you should be updating your bookkeeping records once a week.
Free small business bookkeeping template.
So, what’s bookkeeping anyway?
Simply put, bookkeeping is the process of organizing and recording all your financial transactions so you can accurately report them to the government and have better insight into your finances. This will help you make better decisions for your business. Financial transactions include:
Sale of goods and services
Deposits
Purchases
Bill payments
Transfers
Loan repayments
Owner draws and equity
Basically, it’s keeping track of all the money that comes in and out of your business. And for most new business owners, this means tracking your income and expenses.
By doing so, you’ll be able to see the total you earned, the total you spent, and your net income in any given time period.
What am I keeping track of?
When tracking your business transactions, you want to log four things:
The date
The amount
The payee or payer (who you paid or who paid you)
The income or expense category
The category is the star of the show. It’s what takes your finances from a boring jumble of numbers to a super sexy system that can answer your most pressing financial questions. For example, if you have a category called “Content Marketing,” you can see how much you spent on content marketing during the year AND if increasing your spending increased your revenue.
Income categories
For income tracking, base your categories on your different revenue streams and the questions you want answered about your business. For example, if you own a salon and sell services, retail products, and booth space, you’d want to know how much you earn from each income stream to understand what’s driving the sales in your business. That’s where your income category comes in!
Expense categories
Your expense categories—like your expenditures—often line up with your tax deductions.
You can further customize your expense categories based on what you want to know about your spending. For example, as a salon owner, you may want to know how much you spend on general shop supplies, like waiting room supplies, versus salon-specific supplies, like shampoo and color. Instead of calling everything “supplies,” you can have two categories: shop supplies and salon supplies.
Categorizing your expenses not only makes tax preparation a breeze (hello free time!) but also gives you valuable information about your business’s financial health—including what your cash flow, accounts payable, and accounts receivable actually look like.
How do I track all this stuff?
Most new business owners start with an Excel spreadsheet. The nice thing about a spreadsheet is that you can set it up to calculate your monthly or yearly income and expense totals. This gives you a glimpse into your finances without having to sell your soul to your calculator.
However, spreadsheets require manual entry and are prone to human error. If you forget to enter an expense, then you miss a deduction! Also, as businesses grow, spreadsheets become unruly and overwhelming to manage. Many small business owners find that they can’t keep using a spreadsheet forever and move on to either outsourcing bookkeeping services or using financial accounting software, like Xero or Wave.
These automated bookkeeping programs sync with your bank account and download your transactions. That means automation takes care of three of the four things you need to track: the date, amount, and payee or payer. Your only job is categorization. Pretty sweet, huh?
How often do I need to track my income and expenses?
Ideally, you should do your bookkeeping once a week.
Once a week is the sweet spot between having a break from your finances but not waiting so long that your bookkeeping spirals out of control.
Depending on the size of your business, bookkeeping can take between 30 minutes to several hours a week. The more often you do your bookkeeping, the less time it will take because you’ll build your bookkeeping muscle as you go.
Can’t I wait to start tracking?
You really can’t.
As soon as your business has financial transactions, you should start tracking your income and expenses. The longer you wait to start tracking, the bigger the headache at tax time because you’ll be scrambling to crunch your numbers and remember what the heck you bought nine months ago.
That doesn’t mean you need to jump into a digital accounting program, but you do need to track on a regular basis.
A big mistake new business owners make is thinking they’re too small to track their income and expenses. They blow it off until tax time, and then they’re scrambling to get their numbers in order. Take it from me, doing a year’s worth of bookkeeping the day taxes are due is not fun.
The longer you wait to start tracking, the more financial history you lose. It may not seem like it now, but there will be a point when you want to look back on your finances and review your growth. You can only do that with data—data that you get by tracking your income and expenses.
How do I get started?
Here are the initial steps you need to take to start tracking your income and expenses:
Step 1: Choose a tracking method.
Remember, you don’t need to use the most advanced method yet. Start with a method you’ll actually use and build the habit of tracking. After you have an established bookkeeping routine, you can level up your system. But keep in mind that most bookkeeping data isn’t easily transferred from one system to the next. So if you think you’ll want your historical data in one place, pick one system and stick to it.
Step 2: Set up your categories.
For income categories, consider all the ways you make money in your business. You can start by listing everything you sell and then grouping those items into broad categories. These broad categories should line up with your income streams. For example, in my business, my income categories are consulting services, digital products, content creation, and teaching.
For expenses, refer to a (downloadable) tax deduction cheat sheet and circle all the deductions that relate to your business. Then, think about your spending. Is there anything that you spend money on that’s not listed? Add those to your list of deductions, too.
Step 3: Set aside bookkeeping time.
Choose a day and time when you will commit to doing your bookkeeping each week. Aim to log and categorize your income and expenses at the same time every week. Don’t skip out on your bookkeeping time! It might not be the most entertaining thing in the world, but it will be much less fun if you fall behind
Now, there’s nothing left to do but just DO your bookkeeping. The more you practice, the easier it will become. Over time, you’ll find that you stop getting lost and start getting confident until you can toss out the map and do your bookkeeping all on your own.
FAQs
How much does bookkeeping cost for a small business?
For a small business, bookkeeping can cost anywhere from a couple hundred dollars a month to a few thousand. What you spend depends on your business size, staff, and the complexity of your payroll, as well as which bookkeeping system you choose (doing it yourself, outsourcing it to a CPA, or using accounting software, for example).
Can I do my own bookkeeping, or should I hire a bookkeeper?
You certainly can do your own bookkeeping, but hiring a bookkeeper—or using a bookkeeping platform—is usually easier and more sustainable in the long term. Of course, it costs more money than doing it yourself, but outsourcing your bookkeeping also means you’re not spending time agonizing over spreadsheets or double-checking manual data entry. For business owners who want to grow, getting bookkeeping help is a good first step to putting themselves in a better financial position.
How often should small businesses update their bookkeeping records?
Small businesses should update their bookkeeping and financial records on a weekly or monthly basis at a minimum. If you have a high volume of transactions every day (maybe you’re in retail or ecommerce), you may even want to update your books daily so you don’t fall behind.
What bookkeeping records should a small business keep for tax purposes?
You need to keep almost all of your financial reports and transaction-related records for tax purposes. Think: financial statements like balance sheets, cash flow statements, and income statements; bank account statements and credit card statements; receipts, invoices, and canceled checks; and contracts, purchase agreements, and mileage logs. The Internal Revenue Service (IRS) advises business owners to hold onto their financial information for at least three years from the date they file their taxes.
What bookkeeping software is best for small businesses?
There are tons of bookkeeping software platforms out there for small businesses. The best one for you depends on your industry, size, budget, and accounting needs. QuickBooks Online, Xero, and Zoho are all popular options, but it’s a good idea to browse around, read reviews, and find out which software integrates with tools you already use, like Gusto to process payroll.
